The official "blog of bonanza" for Alfidi Capital. The CEO, Anthony J. Alfidi, publishes periodic commentary on anything and everything related to finance. This blog does NOT give personal financial advice or offer any capital market services. This blog DOES tell the truth about business.

This blog remains agnostic on the subject of whether the euro should continue as a currency. European nations have the option of amending the EU's governance to enact continent-wide taxation and fiscal unity. Short of that, insolvent member states (or their unwilling creditors) will drop out of the union one by one should the EU ever try to enforce the terms of bailouts and debt restructuring deals.

Saturday, May 28, 2011

Claims that the U.S. automobile industry is somehow "resurgent" need to be reexamined. Chrysler and GM have not moved away from product lines that emphasize oversized, fuel-inefficient SUVs. They may be experiencing a temporary competitive reprieve since the Japanese tsunami wiped out several months' worth of production for Toyota et al. Once Japanese automakers reestablish their supply chains, U.S. automakers can forget about recovering their market leadership.

Gas prices are still high. SUVs can't win as long as pump prices stay high. BTW, Detroit is still headed for urban contraction thanks to irreversible population loss.

Traffic-grabbing headlines can gloss over deeper forces at work. China's growth has been impressive but forced; something had to be done to put restive young single men to work to avoid social unrest. Now China is at serious risk of price inflation and a real estate implosion. The country also has too much overbuilt infrastructure serving no immediately useful purpose and potential energy supply constraints it must overcome.

China's political leadership knows that it must keep generating international media attention for its growth narrative if it is to attract value-added manufacturing that complements its leadership in rare earth metal production. Look for India to generate further headlines as it pushes for development of its water delivery infrastructure. Let the headline wars begin, to be followed by resource wars in other emerging markets.

The stock price is suffering, down over 6% today and down by almost half of where it was on June 15, 2010 when it traded at its 52-week high of $36.85. The company's dominant market position is a hard barrier for competitors to overcome, so perhaps this price drop is a boon for FRO watchers looking for a chance to buy.

Monday, May 23, 2011

Here comes a super-fast summary of my portfolio. All options from last month expired unexercised except my equity-covered short calls and cash-covered short puts around my long position in ATHR. The acquisition will close soon and all of those positions will go away, leaving nothing but some arbitrage profits behind.

I renewed my covered calls in GDX, TDW, and FXI with no changes in my underlying long positions in those equities.

I added some short-term Treasuries to my fixed income holdings, which for the past few months have consisted of California state muni bonds. I'm highly confident that the state government takes its obligations to bondholders seriously.

And for the last time, I have no position in YRCW. Never have. Never will. It just makes a really easy target for criticism with a unionized work force dragging it down.

A big chunk of my net worth is still in cash. I await the next leg down in U.S. equities, whenever it may come.

Remember how the Swensen model took institutional investing by storm a few years ago? Its emphasis on illiquid assets was cute until it blew up the endowments at Yale University and other schools. Like many innovations, it peaked too early. Illiquid assets will have their day again and forests are as good as any place to start. Prices for forest products are way up. Yale and its Ivy League sisters just had to hang on for a few more years to see their commitments to forest investing pay off.

Saturday, May 21, 2011

Gas prices are typically high during the summer driving season, when Americans exercise their birthright to go where they please regardless of actual need. The fun fact for 2011 is that gas prices are already high prior to the traditional start of summer fun on Memorial Day. Apparently all that money people are saving by not paying their delinquent mortgages on negative-equity homes is going right into their gas tanks. Paying over $4 per gallon of gas is the new normal, just like permanent structural unemployment around 9%. Note that the Joe Six Packs quoted for color commentary are cutting back on necessities like medicine and clothing before they cut back on gas.

It's time to seriously think outside the box about drastically reconfiguring America's urban landscape away from dependence upon the automobile. The suburban configuration of America demands that Americans impoverish themselves to drive to and from unlivable homes. The American way of life needs a reset to something more sustainable. European towns and Asian cities provide models of the future.

Full disclosure: No positions in oil producers at this time, although that may change later this year.

Speaking of debt and interest rates, we also have Chrysler LLC's proposed payback of government loans. The problem here is that they're paying it back with money obtained from other debt issues. Exchanging debt makes sense if the debtor gets a better term structure of interest rates. Uncle Sam's ZIRP policy makes him the cheapest lender in the country, so going to the capital markets to raise money at higher interest rates makes little sense unless this somehow improves the firm's enterprise value.

Puzzling moves like this make me glad I don't work in corporate treasury offices that have to justify these kinds of decisions on behalf of top management.

Wednesday, May 18, 2011

George Soros's investment strategy has not changed very much in its treatment of gold as an asset class. He only changed the vehicle. He drastically reduced his holdings of GLD and exchanged his stakes in some gold mining companies for other miners. The logic is inescapable. The lack of certainty around the actual bullion holdings in GLD is well-documented (at least in the blogosphere). It makes more sense to own gold where it is most secure - in the ground as ore. Gold stocks' movements are less correlated with the underlying price of gold, so this move aligns the volatility of Soros' precious metals holdings more closely with that of the rest of his portfolio.

Tuesday, May 17, 2011

The U.S. is going to have serious problems generating wealth for its citizens for the remainder of this century if it can't effectively deliver goods to markets. The public infrastructure of America's transportation system is degrading without remediation. The BRIC bloc will soon have so many shiny new airports and railways between them that exporters just won't be able to stay away. Multinational firms will have no difficulty avoiding the U.S. if we make the choice easy for them by not investing in transportation here at home.

This bad news cries out for a remedy. The administration wasted a golden opportunity to fund a new golden age of mass transit funding. Instead of promoting compact urban cores that favor trains over cars, we blew stimulus dough on median strips and traffic controls.

The rest of the world might laugh at us for our national shortsightedness, but they're too busy building infrastructure to notice our foibles. We can do better than this as a nation. All we have to do is spend the $2T on infrastructure instead of on middle class entitlements, Wall Street bailouts, and open-ended occupations.

Monday, May 16, 2011

Derivatives are best used to hedge risk, not to make bets on underlying macroeconomic moves. Futures and forward contracts have been around for ages to allow dealers in raw materials to lock in prices. The time has arrived for shippers to avail themselves of similar instruments to manage risk in freight prices. Freight rate derivatives are ready for prime time.

The market for freight rate derivatives won't be fully mature until major investment firms take on large roles in underwriting and the derivatives are regulated and traded on exchanges. Like all derivatives, they are subject to abuse by traders who misuse them or misrepresent their risks to investors.

Derivatives offer shippers a tool that can complement traditional long-term delivery contracts. This is a welcome development.

Let's do some simple math on how successful YRCW would have to be after the equity recapitalization to truly regain Wall Street's favor. This company hasn't been financially healthy since 2006, when it made $276.6mm for an EPS of 4.82. YRCW's EPS has been negative every year since then. Read the Form 10-Ks yourself, just as I have done. YRCW currently has 47.6mm shares outstanding. Assuming that the dilution of current shareholders does not get any worse than 2.5%, the recap will create 1.9B shares outstanding. If YRCW were to have as healthy a performance as its last positive year in 2006 when EPS was only a modest 4.82 . . . after the pending equity recap makes the denominator in its EPS explode . . . its net earnings would have to be almost $9.2 billion! In other words, a company that's been losing money for the past four years would have to generate bottom-line profits that are more than twice as large as its 2010 top-line gross revenue of $4.3B. That's what dilution does, folks; it makes the earnings mountain even harder to climb for a company that needs to make itself attractive to investors.

I do not know of any publicly-traded company in the world that has ever gone from near bankruptcy to complete possession of its industry. Well, okay, maybe Apple Inc. (AAPL) pulled off something similar after Steve Jobs returned, but he's not running YRCW and AAPL thankfully isn't unionized. Such a miraculous result is usually impossible in the real world. I would never accuse any YRCW bulls of living in the real world. I've done this math for those pumpers, touters, Teamsters, day traders, hedge fund quants, and other people who still hold out hope that YRCW will turn around. Hope is not a method.

Full disclosure: No position in YRCW. Ever. Oh, yeah, no position in AAPL either.

Friday, May 13, 2011

Wouldn't ya know it, just as I was preparing to turn bullish on the transportation sector, a bunch of Black Swans take flight. Just look at how fuel costs are driving up consumer prices. Transporters are passing on their fuel costs because they can't afford to eat them with margin compression anymore.

Tuesday, May 10, 2011

Another shoe has dropped in the euro's long, slow disintegration. Greece's S&P credit rating is headed down the proverbial tubes. The country that gave the world gyros and other fun foods can now knuckle under to Germany's demands for austerity or tell its sovereign debtholders to go jump in the Aegean. They'll probably choose the latter and say goodbye to the eurozone. That means buying a gyro will probably provide more practical utility than putting money into Greek bonds.

Like a house of cards, currency unions look stable until some tiny structural flaw gives way. The eurozone's Achilles heel was always the lack of a unified treasury that could levy taxes and issue debt without regard for any national parliaments. Did you get that Greek reference? Achilles heel, eh? If you didn't, you owe me a gyro. You'll be paying for those in Greek drachmas again soon enough.

Full disclosure: No positions in European currencies or bonds at this time.

Monday, May 09, 2011

The housing market has one again pulled its welcome mat out from under speculators, flippers, and those who thought they could play at landlording. Home prices are still heading down. Falling at 1% per month and 3% per quarter makes for a nice linear projection, but this blog isn't about intellectual laziness. The failure of government intervention has ended housing's artificial bottom. The pending end of the Fed's QE2 will soon drive up mortgage rates and push prices further down, at least until the Fed panics and launches QE3.

No one can accurately call a bottom in U.S. home prices. The only certainty is that prices will bottom someday. Sellers would do well to lower their expectations immediately so this market can find its equilibrium. Buyers would do well to wait. Patience should bring remarkable bargains in foreclosure sales later in 2011.

Full disclosure: No position in IYR but awaiting an entry point around 10x dividends. Seriously.

Friday, May 06, 2011

China's modernization miracle still has a full head of team. A significant part of that steam is powered by coal, one of China's greatest natural resources. Smaller companies like L&L Energy (LLEN) may have a chance to break out if their resources are recoverable at an attractive cost.

A quick review of the basics provides a starting point for further analysis. The P/E of 4.42 (today) is unbelievably low for a resource producer in this age of Fed-induced commodity price explosions. Operating cash flow has been negative for over a year (not good on its face). Quarterly net income has been steady for about a year, which is especially nice given the company's very small long term debt load. ROE is huge at almost 49%! All of the numbers except the cash flow results make LLEN worth a deeper look.

The salient figure for any resource producer is the place on the global cost curve occupied by its four mines in China (unknown at present for LLEN). Its interest in the Bowie Mine in Colorado is harder to value; aside from its booked value as a loan, the equity option may have significant value if the mine can sustain its historical production of 4-5mm tons per year. The TVA's fixed demand for about 3mm tons per year give the project reliable long term cash flow.

The notable news here for potential suitors is that the company's market value and enterprise value are extremely close right now. A market value much higher than enterprise value would suggest some hidden value to be unlocked in an acquisition. This one bears watching to see if it can sustain its numbers and raise its market value.

Wednesday, May 04, 2011

Here's a brief note on something that will catch more investors' eyes in the years ahead. Transocean announced a new deepwater drilling success, possibly even a new world record. This kind of expertise is going to be very much in demand as the low-hanging fruit of onshore and shallow-water drilling is maxed out. The industry needs answers now as it prepares for drilling in the Arctic. How deep will they have to go? How thick is the ice? Answer those questions, plus tons of others, and a lucrative career awaits geologists and engineers north of the Arctic Circle.

The good news up front is due to ultra-low interest rates and more consumer spending enabled by foreclosure delays. Neither of those forces are sustainable after the bond market takes a hike from Treasury purchases.

Sunday, May 01, 2011

The latest news from YRCW is confirmation of the company's ability to eke out an existence that defies reality. Its creditors have agreed to a restructuring. The plan is to cancel the company's massive debts by issuing massive amounts of new equity shares to debt holders. This will leave existing shareholders with no more than 2.5% of the company. Let's do some quick math on that revaluation. YRCW closed Friday at $1.98/share. Reducing that to 2.5% means a single share after dilution will have a market value of $0.0495. The stock isn't even worth a nickel. It will be worth even less if management exercises further dilutive rights after the new equity is issued.

This instant devaluation will immediately subject the firm to another delisting review by NASDAQ. That delisting will make it very difficult for the company to raise the $100mm in new capital it needs to survive.

The earnings call on May 6 will reveal just how long the proposed new financing will carry the company. The company's total cash flow in 2010 was about $61.5mm, so $100mm in new financing would theoretically last more than a year at their present burn rate. If net income turns negative again, the new asset-backed loan covenants may require the surrender of assets. What are the triggers? Creditors are not fools and will not provide money for free. Let's see the agreement's details, please.

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Alfidi Capital is a private financial research firm.Alfidi Capital is not affiliated with any broker-dealer and does not manage money for clients.All information mentioned in this blog is derived from public sources.Alfidi Capital makes no representation as to the accuracy or completeness of this information.Alfidi Capital and its owner, Anthony J. Alfidi, may from time to time hold long or short positions (including options, warrants, rights, and other derivatives) in the securities mentioned in this blog.This blog is provided for informational, educational, and entertainment purposes only and does not constitute a recommendation or solicitation to execute a transaction in any investment product.Investors should consult with a properly licensed and registered investment professional before making any investment decision.The bottom line:Enjoy reading this blog, but the risk you take with investing is entirely your own.